Today TaxMama hears from Scott in the TaxQuips Forum who needs guidance. “My mother in law babysits for me, and I pay her a flat amount every month to do so. Her only job is working for us right now. She needs 3 more years of income to earn enough credits to be fully accrued in Social Security.  What is our best option?  Should we treat her as an independent contractor, or should we issue her a W-2 at year-end?”

 Hi Scott,

IRS Publication 15, deals with employees and payroll. Pub 15 has some special rules when it comes to hiring family. When you hire a parent to take care of your child in your home, you do have to put them on payroll, like anyone else you would hire.  But you don’t have to pay FUTA taxes on their wages.

Since you are married (not divorced, separated, or widowed), all the other payroll taxes apply. Which means, you will be withholding Social Security taxes – and helping her get her three years!

Since your parent is working as a household employee, you can use Schedule H to report the wages and withholding and FICA/Medicare taxes due. Although Schedule H is part of your personal income tax return, you still need to:

a)      Get a Federal employer ID number

b)      Prepare a W-2 and give it to Mom in January.

c)      And you need to register with the state payroll department and file all the usual state payroll tax returns.

Note: Since it’s already December, if Mom has been working for you all year, register with IRS and your state right away to get the ID numbers. File ONE payroll tax return with the state for December wages, treating all the earlier months as advances against the one paycheck.

Perhaps you want to get a tax pro to help you out with this catch-up procdure, at least for this year. You may be able to handle it yourself next year, with a little hands-on guidance. Get on this immediately.

And remember, you can find answers to all kinds of questions about payroll tax issues, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Comments19
  1. TaxMamaFebruary 17, 2014   

    Dear MJR,

    It’s true that tax law does require a particular level of expertise.
    And pretty much most Enrolled Agents and CPAs that specialize in taxation do have the expertise to handle this kind of a case. It’s really quite routine.

  2. mjrFebruary 16, 2014   

    Would you agree that tax law requires a level of particular expertise? That one should avoid seeing general practitioners and instead seek expert advice for tax matters?

  3. TaxMamaOctober 16, 2013   

    Dear Michelle,

    If you agree that it’s fair and you get the money you would have gotten otherwise, then, I suppose it’s fair.

    Now, the question you didn’t ask is – is it legal?

    I don’t know.
    If he is the custodial parent (i.e. the children live with him), then it’s legal.
    If he’s not…then there may be problems if he’s ever audited.

    Note: If you do agree to this arrangement, make sure you do a full computation of ALL the benefits you would have gotten if you had claimed the children – all the credits, all the deductions, the lower taxes from being head of household, etc.

    As to your daughter from a previous marriage.
    As long as she is under age 24, a full time student, and you support her, she is your dependent.

    Should you file an amended tax return to claim the refunds?
    I don’t know.

    When you amend a tax return, you re-open that tax return to audit for another 3 years.
    Is there anything in those tax returns you don’t want the IRS to have extra time to audit?

    Good luck.

    Hugs
    Eva

  4. michelle lindleyOctober 16, 2013   

    My husband and I have mediated our divorce except for taxes. I have 2 questions:
    1. is it fair for him to claim our 3 kids each year and then reimburse me for what i would have received had i claimed them?

    2. I have a daughter from a previous marriage, now 20 and has been in college since 18.
    She has not been claimed on anyone’s taxes since 2009. My husband’s tax man suggests we claim her from 2009-2012. We are filing jointly. My husband is paying the taxes and would like the deduction. He is willing to pay me 1/2 of what he is getting in the deductions. Is this fair?

  5. TaxMamaMarch 26, 2013   

    Well then, Rich,

    Clearly, he is NOT just “working on your personal home”, is he?

    Send him a 1099 for the full amount you pay him. Deduct only 20% net on the office in home. (You will enter 100% and the form will use 20% based on the sq ft you enter on Form 8829.)

    Hugs
    Eva

  6. RichMarch 25, 2013   

    You write: “So, if your gardener is strictly working on your personal home, not for a home office…No! You don’t need to send him a 1099-MISC.” – My question: What if you take a home office deduction? I use about 20% of my home as an office and take the deduction. Does that trigger anything for the gardener? I pay under $1000 a year to him.

  7. Linda DorfmontMarch 18, 2013   

    Regarding the alleged overpayment of insurance proceeds, since the payment was made as a death benefit, the insurance company ;should have issued Form 712 explaining how much of the payment was the proceeds of the policy, and how much was interest on the proceeds, and return of premium. No 1099 Misc. should have been issued. The 712 goes to the IRS and explains the breakdown of the payment. The widow should ask the insurance company for Form 712 and a correction to the Form 1099 Misc. showing 1 non=-employee compensation.

  8. RozFebruary 11, 2013   

    Thank you! I don’t think she was there the
    day they were giving out “character “:)
    xox. Roz

  9. TaxMamaFebruary 11, 2013   

    Hmpf, Roz!

    If she ran off with someone, I say, let HIM support her and her children.

    Alas, he files as MFS.
    Should look into getting a divorce.

    But…at the level of income a dishwasher has,
    the tax bracket is probably similar – MFS or MFJ.

    As to itemized deductions?
    If he always itemized, he should continue.
    She knows it. It’s up to her to figure out how to file her return.

    However, if she has ANY character at all, she should split the children
    with him for HOH and any potential credits. A child does not have to
    live with you to be a dependent, etc.

    Hugs
    Eva

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